How To Register Your Business

Once you’ve decided to make the smart move of registering your business to take advantage of all the legal and tax benefits, you’ll need to decide how to register. You will need to designate your business as one of the four main types—Sole Proprietorship, Partnership, Limited Liability Corporation (LLC), and Corporation. The type you choose primarily depends on your business structure. It’s important to choose wisely, as your designation will determine your tax liability, personal liability, and ability to raise capital, as well as affect the paperwork you will be required to file.

Sole Proprietorship

If you are the only owner of your business, the simplest option is to form a sole proprietorship. There are several benefits of this choice. First, it is very easy to do; you might not even have to file paperwork. If you conduct business and do not register as any other type, you are automatically deemed a sole proprietorship. You also have total control over your business. This leads to drawbacks, however. You are not forming a separate business entity, and therefore your personal assets and liabilities are not separated from your business. You could be personally responsible for corporate debt, and if you are sued, lawyers could go after your personal assets, such as savings accounts, vehicles, and real estate.

Forming a sole proprietorship is a good idea for low-risk businesses and can be a good first step if you have a business idea you want to try out in the marketplace before forming a more official company.

Partnership

If you own your business with another person or other people, the simplest option for you is to form a partnership. The most common types are general partnerships, limited liability partnerships (LLP), and limited partnerships (LP). In deciding which type to register as, you will want to consider how assets, profits, and liability are shared.

In general partnerships, all partners share profits, legal liability, and financial liability equally. In limited liability partnerships, each partner has limited liability. This protects each partner from other partners’ actions. This is a common arrangement for groups of physicians and lawyers, as it protects each partner from potential malpractice claims against their partners. In limited partnerships, one partner has unlimited liability while the others have limited liability. In this arrangement, the partner with unlimited liability often retains more control over the company, while the others have less involvement in the management of the company. Partnerships are ideal for groups of professionals, as well as for groups who want to try out the marketplace before forming a more official company.

Limited Liability Corporation (LLC)

If you are looking for more protection from legal liability, then the LLC is a good option. An LLC is sort of a mix between a partnership and corporation. Like a corporation, an LLC offers personal liability protection, protecting your personal assets if your company goes into debt or bankruptcy or if you are faced with a lawsuit. And like a partnership or sole proprietorship, it gives you a more simplistic tax structure. In addition to the personal protection, the benefits of forming an LLC include not having to pay corporate taxes, management flexibility, and credibility for your company—especially when it comes to banking and access to capital. The disadvantages include incurring costs to form the LLC (which vary from state to state) and following rules regarding maintenance and dissolution of the LLC. For example, some states require that if a founder departs, the LLC must be dissolved, whereas a corporation has more longevity.

LLCs are ideal for higher-risk businesses, for owners who have extensive personal assets they wish to protect, and for those who wish to pay a lower corporate tax rate.

Corporation

If you are looking for the highest level of personal protection from liability, then forming a corporation is the way to go. A corporation is formed by filing articles of incorporation, creating a legal entity separate from its owners that can turn a profit, be taxed, and be held legally liable. The two most common types are C corporations and S corporations, which draw their names from tax classifications. S corporations are limited to one class of stock and 100 shareholders, while C corporations can have multiple classes of stock and unlimited shareholders. Both can live on after the founders are no longer involved. The major difference between these comes down to how they are taxed. Corporations pay income tax on their profits. Profits of C corporations can be taxed twice—first, on the company profit and second, when dividends are paid to shareholders on their personal tax returns. S corporations are designed to avoid the double taxation, with profits passed directly to owners’ personal income without being subject to corporate tax rates. The S corporation was designed for smaller businesses that are looking to treat owners more equitably, while the C corporation was designed to offer businesses unlimited potential to grow and allow for flexibility regarding ownership and profit distribution.

Along with the potential to attract more capital investment, the major benefit of forming a corporation is that it offers the highest personal protection from liability. However, that comes at the highest cost, which is a disadvantage, along with the increased paperwork and ongoing fees. Filing as a corporation is the best choice for businesses with high risk, businesses that need to raise capital, and those who plan to go public or ultimately be sold off.

When making your decision of how to register your business, you should consider liability, taxation, costs, and your plans for the future. Your choice will depend on questions such as how many employees you want to hire, whether or not you might want to sell your business one day, and whether or not you want your business to live on after you’re gone. You can always change your designation as you continue to grow, but if you have clear answers to these questions now, you can save yourself time and money in the long run. Still not sure if you should register your business? Learn more by reading our blog post called Why You Should Register Your Business. You can also download our complete guide.

Live Oak Bank does not provide tax advice. Please consult with your accountant.